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Euro Area inflation differentials: the role of fiscal policies revisited

Author

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  • Checherita-Westphal, Cristina
  • Leiner-Killinger, Nadine
  • Schildmann, Teresa

Abstract

This paper provides a comprehensive empirical analysis of the role of discretionary fiscal policy for inflation differentials across the 19 euro area countries over the period 1999-2019. The results confirm existing (older) literature that it is difficult to find robust evidence of the fiscal policy stance or impulse impacting directly on inflation differentials. We do find, however, support for an indirect effect of discretionary fiscal policy on inflation differentials working through the output gap channel. There is also some evidence that fiscal policy may be especially potent in influencing inflation differentials – with fiscal tightening cooling (and fiscal expansion increasing) inflation pressures – when the economy is above its potential. Finally, going from the overall fiscal stance or impulse to individual fiscal instruments, we find that value added tax (VAT) rate changes and public wage growth are statistically significant determinants of inflation differentials in our sample. JEL Classification: E31, E62, E63, F45

Suggested Citation

  • Checherita-Westphal, Cristina & Leiner-Killinger, Nadine & Schildmann, Teresa, 2023. "Euro Area inflation differentials: the role of fiscal policies revisited," Working Paper Series 2774, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20232774
    Note: 1790315
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    More about this item

    Keywords

    fiscal policy; inflation differentials; public wages; tax policy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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